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UBS morning Advisor

  1. 1. Global FX Strategy Research Global UBS Investment Research Research Note The Morning Adviser Foreign Exchange RBA Cuts 50 bp 1 May 2012 Gareth Berry FX Strategist +65 6495 5232  The RBA cut the cash rate by 50 bp overnight, hugely surpassing market expectations. A cut had been expected, but the vast majority of economic opinion had been looking for a smaller 25 bp. Even the rates market (which has been habitually over-dovish over the past 9 months) was not dovish enough for today’s meeting, and only 34 bp of easing was priced in ahead of the actual decision. AUDUSD dropped 80 pips and still looks heavy. The decision itself is unusual historically – although the bank has cut in increments of more than 25 bp before, this has usually been in response to external shocks. For example, the cash rate was lowered by 100 bp in Feb 2009 during the depths of the global financial crisis. Although we will have to wait until Friday’s quarterly Statement of Monetary Policy to see the full rationale, today’s policy statement pointed again to the likelihood of “below trend” growth, but stressed that there was no evidence that a “deep downturn” is occurring. In response, our Australia economics team have changed their RBA call – they now think the RBA will cut again in August taking the cash rate to 3.5% by year end (and not 3.75% as originally forecast). Elsewhere, Japanese officials have raised their rhetoric in response to USDJPY falling through 80.00, describing the move as “somewhat rapid”. Special attention was paid to the risk that speculators might take advantage of thin holiday markets to push the yen higher. Otherwise, on Tuesday manufacturing ISM is the key data point and we are slightly above consensus in looking for a 53.5 release. The UK will release its own figures for manufacturing sentiment, while BoC’s Carney will likely continue his assertive views on the Canadian economy. Key Events 01 May 2012 Source: UBS Global Economics Country GMT Release/Event Frequency UBS Prev/Revised Consensus Actual UK 08:30 PMI Manufacturing (Apr) index 51.8 52.1 51.5 United States 13:30 Feds Kocherlakota Speaks United States 14:00 ISM Manufacturing (Apr) index 53.5 53.4 53.0 United States 15:00 Feds Williams Speaks Canada 15:30 BoCs Carney Speaks United States 16:30 Feds Evans & Lockhart to Speak United States 19:00 Feds Plosser speaks Research Spotlight Oil And The Dollar UBS G10 FX Strategy  Over the next few years, oil will impact FX as among the worlds major oil-importing regions, the US will significantly reduce its foreign energy purchases owing to their boom in tight oil. In contrast, Europe, Japan and emerging Asia will experience substantial deficits on their petro-balances. Historically high energy prices will lead to vast FX reserves for oil producers. The diversification of these reserves will also impact currency markets. Please see for details.This report has been prepared by UBS LimitedANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 5
  2. 2. The Morning Adviser 01 May 2012EUR Targets: EURUSD 1m 1.30, 3m 1.25 The ECB released data on the purchase of Eurozone Government bonds by the respective member states’ banks. In March, Spanish banks bought EUR20.1 bn Eurozone government bonds, while Italian banks bought EUR23.7 bn, Portuguese banks bought EUR505 mn, and French banks bought EUR8.3 bn. This begs the question as to how governments will be able to fund if the ECB is unable or unwilling to provide liquidity extension. Responding to the popular support towards including the growth component in the fiscal compact, German finance minister reiterated that euro-zone must stick to austerity-led recovery plan and the discussion about growth “shouldn’t be understood as a change in direction”. Schauble’s comments follow similar remarks from Angela Merkel who said that there is no conflict between “a solid budget policy and investing in the future”. Retail sales in Germany grew by 0.8% m/m (cons: 1.0%, prior: -1.1%) in March. The y/y number grew by 2.3% (cons: 0.5%, prior: 1.7%). Spain is now in recession, a second time since 2009, printing a q/q GDP of -0.3% (cons: -0.4%, cons: -0.3%) for 1Q2012. The EU harmonized CPI in Italy fell in April to 0.9% q/q from 2.5% in March but the y/y number remained high at an unchanged 3.8%. The euro zone CPI estimate in April printed 2.6% y/y (cons: 2.5%, prior: 2.7%). Egan Jones, another ratings agency, downgraded Spain to junk status (BB+). As previously announced, Jean-Claude Juncker stepped down as the head of the Eurogroup. Referring to the influence in policy making, Juncker stated that France and Germany “act as if they are the only members of the group”.JPY Targets: USDJPY 1m 80.00, 3m 85.00 Takeihiko Nakao, Japan’s Vice Finance Minister for International Affairs said that the yen’s rise since last week has been “somewhat rapid” and that Japan will act in a timely and appropriate manner when needed. He said he would stay vigilant against the risk that speculators will take advantage of thin holiday markets. Apart from Labour Day today, Japan is also on holiday for most of this week.AUD Targets: AUDUSD 1m 1.05, 3m 1.00 Shortly after the RBA’s policy decision, Australia’s Treasurer Swan repeated that the government’s drive to return to a fiscal surplus by next year gives the RBA maximum room to ease policy, given that the RBA takes fiscal conditions into account when steering monetary policy. Swan added that the strong Australian dollar is pressuring tourism and manufacturing.CAD Targets: USDCAD 1m 0.99, 3m 0.98 Canada’s trade minister said the Canadian dollar is likely to stay strong and that industry needs to adapt to this. UBS 2
  3. 3. The Morning Adviser 01 May 2012FX TechnicalsAUDUSD 1.0260 support Initial resistance is at 1.3291, a break above would open 1.3386. Near-term EURUSD BULLISH support lies at 1.3158. The sharp sell-off through 80.10 has exposed support at 79.53, the October USDJPY BEARISH high. Next level comes in at 79.14. Resistance is at 80.39. Resistance is marked at 1.6302/34 area, a break through which would open GBPUSD BULLISH up the doors to 1.6455. Support lies at 1.6112. The focus is on support at 0.9002, where a break would open 0.8931. USDCHF BEARISH Resistance is at 0.9134. The pair resumes weakness with the break of 1.0350. Support now is at AUDUSD BEARISH 1.0260/26 area. Resistance is at 1.0489. Violation of 0.9800 would trigger extension of losses towards 0.9766. USDCAD BEARISH Resistance is at 0.9927. EURCHF NEUTRAL Resistance is at 1.2070, while support lies at 1.2000. A clearance of 0.8123 would open the doors for a move towards 0.8068. EURGBP BEARISH Resistance is at 0.8222. Trend conditions are bearish; a move below 105.29 would expose 104.61/24. EURJPY BEARISH Resistance is at 106.44 ahead of 108.03.*NOTE: The trend for each currency pair as defined in the table is determined by our proprietary model and is independent of our discretionary interpretationof price actionSource: UBS FX Strategy UBS 3
  4. 4. The Morning Adviser 01 May 2012Key Events 01 May 2012 Source: UBS Global EconomicsCountry GMT Release/Event Frequency UBS Prev/Revised Consensus ActualNew Zealand 22:45 Average Hourly Earnings (Q1) q-o-q n/a 0.00% n/a 1.30%New Zealand 22:45 Private Wages Exc Overtime (Q1) q-o-q 0.50% 0.60% 0.60% 0.50%New Zealand 22:45 Private Wages Inc Overtime (Q1) q-o-q n/a 0.70% 0.50% 0.50%Australia 23:30 AiG Performance of Mfg Index (Apr) index n/a 49.5 n/a 43.9China 01:00 PMI Manufacturing (Apr) index n/a 53.1 53.6 53.3Australia 01:30 House Price Index (Q1) q-o-q 0.00% -0.70% -0.50% -1.10%Australia 01:30 House Price Index (Q1) y-o-y -3.90% -4.50% -3.90% -4.50%Australia 04:30 RBA Cash Target % 4.00% 4.25% 4.00%Japan 05:00 Vehicle Sales (Apr) y-o-y n/a 78.20% n/aAustralia 06:30 RBA Commodity Index sdr (Apr) y-o-y n/a 2.70% n/aUK 08:30 PMI Manufacturing (Apr) index 51.8 52.1 51.5United States 13:30 Feds Kocherlakota SpeaksUnited States 14:00 Construction Spending (Mar) m-o-m n/a -1.10% 0.50%United States 14:00 ISM Manufacturing (Apr) index n/a 53.4 53.0United States 14:00 ISM Prices Paid (Apr) index n/a 61.0 59.0United States 15:00 Feds Williams SpeaksCanada 15:30 BoCs Carney SpeaksUnited States 16:30 Feds Evans & Lockhart to SpeakUnited States 19:00 Feds Plosser speaksUnited States 21:00 Total Vehicle Sales (Apr) units mn n/a 14.32 14.40United States 21:00 Domestic Vehicle Sales (Apr) units mn n/a 11.09 11.10UK Halifax House Price (Apr) 3m/year 2.10% -0.60% 0.40%UK Halifax House Prices sa (Apr) m-o-m 0.00% 2.20% -0.80%Source: UBS Economics UBS 4
  5. 5. The Morning Adviser 01 May 2012Analyst CertificationEach research analyst primarily responsible for the content of this research report, in whole or in part, certifies that withrespect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflecthis or her personal views about those securities or issuers and were prepared in an independent manner, including withrespect to UBS, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed by that research analyst in the research report.Required DisclosuresThis report has been prepared by UBS Limited, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliatesare referred to herein as UBS.For information on the ways in which UBS manages conflicts and maintains independence of its research product;historical performance information; and certain additional disclosures concerning UBS research recommendations,please visit . The figures contained in performance charts refer to the past; past performance isnot a reliable indicator of future results. Additional information will be made available upon request. UBS Securities Co.Limited is licensed to conduct securities investment consultancy businesses by the China Securities RegulatoryCommission. UBS 5
  6. 6. The Morning Adviser 01 May 2012Global DisclaimerThis document has been prepared by UBS Limited, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS.This document is for distribution only as may be permitted by law. It is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located inany locality, state, country or other jurisdiction where such jurisdiction, publication, availability or use would be contrary to law or regulation or would subject UBS to any registration or licensingrequirement within such jurisdiction. It is published solely for information purposes, it is not an advertisement nor is it a solicitation or an offer to buy or sell any financial instruments or toparticipate in any particular trading strategy. 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